Bajaj Finance rating ‘neutral’ – fall in moratorium rate welcome surprise

The cross-sell ratio to existing customers stood at ~70% (up from 66% y-o-y).

Bajaj Finance (BAF) has released a pre-quarter update on key business details. Given the lockdown, BAF’s customer franchise grew a modest 1% q-o-q to 43m. Nevertheless, the company acquired 0.5 m new customers and disbursed 1.7 m loans during the quarter. The cross-sell ratio to existing customers stood at ~70% (up from 66% y-o-y).

• As per ALM disclosures in its Annual Report, ~13% of AUM was supposed to be repaid in Q1FY21. However, due to moratorium, repayment rate was expected to be lower at 8–9%. With full resumption of activity in June, BAF was able to restrict consol. AUM decline to ~6% q/q to Rs 1.38 trn. With normalisation returning sooner than expected, we upgrade our growth estimates to 12% in FY21 v/s 3% earlier.
• The biggest surprise was reflected in the moratorium book: AUM share under moratorium declined to 15.5% in June from 27% in April. On an absolute basis, the moratorium book declined 40–45% to Rs 210 bn. This is a welcome surprise, owing to which we now factor in lower stress addition. So we cut FY21/ FY22 credit cost by 50bp/25bp to 3.9%/3.1%. While BAF took Rs 9 bn COVID-19-related provisions in Q4FY20, it may take additional provisions in Q1FY21 as well.
• The deposit base declined 7% q/q to Rs 200 bn; we await clarity from management on the same. Liquidity on the balance sheet increased 12% q/q to Rs 176 bn.

Valuation and view: The sharp reduction in morat. is a big positive. Better performance in asset quality would result in big delta to earnings via lower credit cost/margin compression. While q-o-q fall in AUM is in line with expectation, a pickup in economic activities should lead to better AUM growth going forward.

On the other hand, BAF is likely to benefit from lower cost of funds from bank loans as well as market borrowings. While we have baked in NIM compression of 90bp, there is room for a surprise. BAF is also looking to cut the flab in the system and improve opex to assets (we bake in a 100bp y-o-yY drop) to counter pressure on the topline. Overall, we have upgraded our earnings estimates by ~15% for FY21/FY22 to factor in better AUM growth, a reduction in credit cost, and slightly better margins. Maintain Neutral, with TP of Rs 3,000 (4.2x FY22e BVPS; implied 25x PE FY22).